Suppose that an economy is estimated to have a 5% unemployment rate in the long-run. Furthermore, the country observes a decrease in inflation by2percentage points for every percentage point highertheunemployment rate is relative to the natural rate of unemployment. a.(2 points)
Write out the Phillips curve equation if the population has adaptive expectations for inflation and there are no inflation shocks. b.(6 points)
Suppose that the current inflation rate is 22%. The central bank announces that it plans to lower the inflation rate by 6 percentage points per year beginning in the following year until the inflation rate hits 4%. The central bank then intends to maintain the inflation rate at 4% afterwards. Determine the unemployment rate for the next five years .
Draw the short-run Phillips Curve and the Long-run Phillips Curve on the same diagram. Demonstrate the values for inflation and unemployment you calculated from part (b).d.(4 points) Suppose that the economy instead had rational expectations and that the central bank announcement was credible. Determine the unemployment rate for the next five years.(4 points)
Draw the short-run Phillips Curve and the Long-run Phillips Curve on the same diagram. Demonstrate how the figure changes with the credible central bank announcement. Explain the reasoning behind this change. II.(4 points)
Enumerate and explain three reasons why short-term forecasting models may be accurate for long-term forecasting. III.(6 points) What are the core principles that macroeconomists agree on according to Taylor (1997)? Explain each one in your own words.